With the U.S. economy showing flickers of recovery, Congress and President Barack Obama last month hammered out the 2010 Tax Relief Act, extending tax cuts put in place by President George W. Bush and tossing in other incentives meant to keep the nation moving out of recession. While it has 2010 in the name, the legislation will affect tax returns for Americans through 2012.

Something for everybody

Perhaps most important, the 2010 Tax Relief Act staved off increases to individual tax income brackets that had been scheduled to increase for this tax year, with the 10% bracket disappearing entirely and other brackets increasing by several percentage points. The tax rates for capital gains and dividend taxes will stay at 15%; they had been scheduled to move up to 20% and 39.6% respectively. In addition, the act extends relief from the so-called “marriage penalty,” which raised tax brackets and reduced deductions for married couples, for another two years.

Even before they file their 2010 tax returns, Americans will feel the impact of this bill in the form of a 2% reduction in the Social Security payroll tax on taxable wages earned in 2011. Steven E. Sender, vice president of Twinsburg-based Warfield & Sender CPAs, says that while the government is likely hoping Americans will take that additional take-home pay to the mall, it is a good idea to put a portion of it – even just $50 per pay period – into a retirement account. “Remember that by putting (some of the 2%) in a 401(k) or 403(b) you can reduce your taxable income and reduce your tax burden,” he explains.

Sender also notes that as of 2010, the Roth IRA is more attractive for many taxpayers. Prior to 2010, married couples with an adjusted gross income (AGI) more than $100,000 were ineligible to make a conversion from a Traditional IRA to a Roth IRA; now both the AGI limitation and married filing joint requirement have been removed for the purpose of conversion.

The battleground

It took until Dec. 17 for Congress and President Obama to come up with legislation they could agree on. The key sticking points were tax breaks that benefit higher-income earners. Under the new tax act, personal exemptions and itemized deductions, which were to have been reduced based on income, will stay where they have been in past years. Bob Gross of Beachwood-based Gross and Company calls these provisions of the act “very good news for higher-income people” that could save families significant amounts on their taxes.

Beware and be aware

In addition to the parts of the tax law making big headlines – such as the patch to the Alternative Minimum Tax that prevented middle-income households from being hit by a much higher tax bill – some lesser-known provisions of the bill can have major impacts. Sender cites the extension of the American Opportunity Tax Credit, an education credit particularly important for out-of-work Americans who are retooling their skills in search of new career options.

Taxpayers will also benefit from the increase in the dependent care credit (which can include tuition paid before kindergarten) and a two-year extension of the $1,000 child tax credit. In addition, the revision and extension of the energy credits as a key feature of the bill will benefit many households, says Gross.

On the downside, says Sender, the ability to take a deduction for real property taxes without itemizing has “gone by the wayside.” Without the additional standard deduction for real property taxes, if you want that deduction, you’ll have to itemize to get it.

Doing business

Another potential boost for business, says Gross, is the Section 179 expense deduction, which provides a deduction for eligible business equipment purchases. A new tax rule raises the ceiling on deductions for those purchases from $250,000 to $500,000.

Gross also points to the Small Business Health Credit as a boon to companies with fewer than 25 employees. It offers a tax credit to help defray the cost of offering employees health insurance by allowing the employer to take a deduction on its portion of the health insurance premium.

However, employees who use their automobiles for business will see their standard mileage rate drop from 54 cents a mile to 50 cents a mile, adds Gross. But, the government has “been known to increase the rate in response to rising gas prices,” he adds.

The 2010 Tax Relief Act includes many more provisions that may impact you. It is advisable to consult with a certified professional accountant or a tax law expert before filing your 2010 tax return.

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